WCM (Receivables & Inventory).docx - Premium Course...

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Premium Course Notes[Session 5 and 6]Chapter 9 Managing Inventory, Accounts Receivable andAccounts PayableSYLLABUS1.Discuss, apply and evaluate the use of relevant techniques in managing inventory,including the EOQ model and JIT techniques.2.Discuss, apply and evaluate the use of relevant techniques in managing accountsreceivable, including:(a)assessing creditworthiness(b)managing accounts receivable(c)collecting amounts owing(d)offering early settlement discounts(e)using factoring and invoice discounting(f)managing foreign accounts receivable3.Discuss and apply the use of relevant techniques in managing accounts payable,including:(a)using trade credit effectively(b)evaluating the benefits of discounts for early settlement and bulk purchase(c)managing foreign accounts payablePrepared by Patrick LuiP. 226Copyright @ Kaplan Financial 2015
Premium Course Notes[Session 5 and 6]Hi ghandLo wI nvent o r yCos t sObj ect i vesEOQDi s count sCons i der at i o nI nvent or yLeve lJ I TI nvent or i e sBal anci ngActCr edi t wor t hi nes sCr edi tPol i c ySet t l emen tDi s count sFact or i ngandI nvoi ceDi s count i n gAccount sRecei vabl eBal anci ngActTr adeCr edi tAccount sPayabl eExpor t Cr edi t Ri s kandFor ei gnEx changeRi s kFor ei gnTr adeManagi ngWor ki ngCapi t a lPrepared by Patrick LuiP. 227Copyright @ Kaplan Financial 2015
Premium Course Notes[Session 5 and 6]1.Managing Inventories1.1Costs of inventories1.1.1Inventory is a major investment for many companies. Manufacturing companies caneasily be carrying inventory equivalent to between 50% and 100% of the revenue ofthe business. It is therefore essential to reduce the levels of inventory held to thenecessary minimum.1.1.2Costs of High Inventory LevelsKeeping inventory levels high is expensive owing to:(a)purchase costs(b)holding costs(i)storage(ii)stores administration(iii)risk of theft/damage/obsolescence1.1.3Carrying inventory involves a major working capital investment and therefore levelsneed to be very tightly controlled. The cost is not just that of purchasing the goods,Prepared by Patrick LuiP. 228Copyright @ Kaplan Financial 2015
Premium Course Notes[Session 5 and 6]but also storing, insuring, and managing them once they are in inventory.1.1.4Purchase costs: once goods are purchased, capital is tied upin them and until soldon (in their current state or converted into a finished product), the capital earns noreturn. This lost return is an opportunity costof holding the inventory.1.1.5Stores administration: in addition, the goods must be stored. The company mustincur the expense of renting out warehouse space, or if using space they own, there isan opportunity costassociated with the alternative uses the spacecould be put to.There may also be additional requirements such as controlled temperature or light

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